Updates
Date:
This article was written by
Certified Tax Advisor, Lawyer, Director, National Office Tax & Legal
Certified Tax Advisor, Manager, National Office Tax & Legal
The Tax Audit Regulations currently contain an explicit provision regarding the audit of recent tax periods. Since the Act on the Modernization of Tax Procedural Law of December 20, 2022 (Federal Law Gazette I 2022, p. 2730), among other things, aims to ensure that audits are conducted in a timely manner in all cases, this existing provision is to be repealed. In the future, an external tax audit is generally to take place promptly after the end of the last assessment or filing period to be audited. However, according to the explanatory memorandum to the External Tax Audit Regulations, the taxpayer has no legal claim to this.
As before, the external tax audit must generally be conducted at the taxpayer’s business premises. If it can be demonstrated that suitable business premises are not available, the external tax audit may be conducted at the taxpayer’s residence or at the tax office. These two alternatives are now considered equally valid; previously, an audit at the taxpayer’s residence took precedence over one conducted at the tax office. As before, another audit location, such as the tax office’s premises, is only considered in exceptional cases. If documents are submitted to the tax authorities in digital form, they may be stored and processed on a secure data processing system.
As before, the tax authorities are to determine the scope of the external tax audit - limited to what is necessary - in accordance with their professional judgment. What is new is that, when ordering and conducting audit measures, the principles of proportionality of means and minimal interference must be observed, while upholding the principle of materiality. At the outset of the audit, key audit areas should therefore be identified. The external tax audit should generally focus on matters that could, for example, lead to definitive tax losses or other significant tax implications. In doing so, findings from both international and, where applicable, national risk assessment procedures should also be taken into account.
As has been the case to date, for large businesses, corporate groups, and internationally affiliated companies, the audit period is to follow immediately after the preceding audit period (a so-called follow-up audit). It should now be possible to deviate from this rule if, in accordance with the principle of uniformity of taxation and taking into account the circumstances of the individual case,
does not appear relevant or necessary.
For businesses other than those mentioned above, the audit period should generally not exceed three consecutive tax periods, as has been the case to date. However, it should now also be possible to limit the audit period to two or even just one tax period.
Under the Act on the Modernization of Tax Procedural Law, among other things, effective January 1, 2023, an audit order may be issued to require the submission of documents subject to recording or retention obligations within a reasonable period of time (Section 197 (3), first sentence, of the German Fiscal Code (Abgabenordnung; AO)). On the other hand, since then, agreements regarding regular discussions on the established facts and the possible tax implications (Section 199 (2), sentence 2 AO) as well as binding guidelines for the specific arrangement of the taxpayer’s cooperation (Section 199 (2), sentence 3 AO) may be entered into in writing with the aim of ensuring the expeditious conduct of the external tax audit.
For example, the following provisions should be able to be included in a framework agreement:
The framework agreement concluded between the tax authority and the taxpayer should be amendable in writing by mutual agreement or terminable unilaterally in writing.
The Act on the Modernization of Tax Procedural Law, among other things, introduced the so-called “qualified request for cooperation” effective January 1, 2023. Under this provision, a taxpayer may be requested to cooperate in a written or electronic request for cooperation six months after the issuance of the audit order (Section 200a AO).
As a general rule, a request for qualified cooperation is subject to the condition that the taxpayer
If the audit order required the submission of documents subject to record-keeping or retention requirements, this should be the first such request.
If the taxpayer fails to comply with the qualified request for cooperation within the specified time limit, or does so only to an insufficient extent, a penalty for delay in cooperation in the amount of EUR 75 shall be imposed for each full calendar day of delay, up to a maximum of 150 calendar days (Section 200a (2), first sentence et seq. AO).
So-called group companies within the meaning of Section 18 of the German Stock Corporation Act (Aktiengesetz; AktG) must be audited in a coordinated manner, under unified management, and according to uniform criteria if the aggregate external revenue of the group companies amounts to at least EUR 50 million (previously: EUR 25 million) per year. The planned increase in the threshold is intended, among other things, to avoid the need for a formal group audit in the case of smaller groups. Instead, the appropriateness of a group audit is to be assessed on the basis of risk criteria.
In addition, however, the new provisions are intended to allow for the audit of foreign companies that are parties to domestic tax proceedings, regardless of where the controlling company is domiciled. This amendment applies, among other things, to certain real estate companies with limited tax liability, in which international investors regularly acquire domestic real estate through special-purpose vehicles with their registered offices and management abroad. The scope of application is intentionally broad to cover as many conceivable scenarios as possible. However, the draft of the External Tax Audit Regulations does not address the specific implementation of such audits.
Payroll tax business establishments are to be audited in a coordinated manner, under a single management structure, and according to uniform criteria (so-called coordinated payroll tax external audit) if they belong to a group of companies within the meaning of Section 18 AktG or to a single company, and if their total external revenue amounts to at least EUR 50 million per year and they employ a total of at least 10,000 employees. In addition, coordinated payroll tax external audits may also be conducted in other cases.
Coordinated payroll tax external audits have been mandatory as of January 1, 2024.
Notice:
Since the External Tax Audit Regulations are a statutory regulation issued by the federal government, they “only” need to be approved by the Federal Council in the next step.